Wall Street Beat: Tech shares hit 7-year low, bounce back

Wall Street Beat: Tech shares hit 7-year low, bounce back

Shares of technology vendors are bouncing back after hitting a seven-year low Monday, but a sustained comeback is uncertain.

Shares of technology vendors are bouncing back after hitting a seven-year low Monday, but bad news including dour reports on the mobile and components sectors are a reminder that the continuing recession makes the beginning of a sustained comeback unlikely.

The technology-heavy Nasdaq Composite Index closed Thursday at 1426, up by 54 - or 3.97 per cent - buoyed by a market rally sparked Tuesday by Citigroup's announcement that it was profitable in January and February. It was the market's first three-day rally in more than a month.

However, at the beginning of the week, tech companies led a broad market decline that saw indexes hitting levels they had not reached in years. The Nasdaq fell 25.21 points, or 2 per cent, to close at 1268.64, its lowest close since October 2002 near the trough of the dot-com bust.

Sales of tech companies have been hit hard, driving down shares of a broad swath of technology products. Even high-flying Internet stars like Google have been hit. Google shares for example sank 5.7 per cent Monday to US$290.89, though they recovered later in the week.

Tech companies also led the Dow Jones Industrial Average to decline by more than 79 points Monday, or 1.2 per cent, to 6547, its lowest close since April 1997. IBM shares dropped by 2.7 per cent and Hewlett-Packard shares lost 5.1 per cent.

Despite the rally of the past few days, IT forecasts for the rest of the year raise the specter of new lows for technology shares and profits.

The global recession hit the mobile-phone market especially hard in the fourth quarter, leading IDC to lower its forecast for the year.

IDC expects global mobile-phone unit sales to fall 8.3 per cent this year, the first annual decline since 2001. In December, IDC was predicting a drop of 1.9 per cent.

Even the mobile category's star segment - smartphones - won't be doing as well as had been predicted earlier. IDC now says smartphone unit sales will increase 3.4 per cent this year, compared to the 8.7 per cent growth it had forecast previously.

The chip sector is also expected to be hard-hit this year, as demand for hardware erodes. IDC said last week that PC shipments are expected to fall by 4.5 per cent in 2009.

On Wednesday, preparing for the sector decline, National Semiconductor said it plans to eliminate 26 per cent of its workforce, or more than 1,700 jobs. The company also reported that its fiscal third-quarter profit dropped 71 per cent to $21.1 million, as sales declined 36 per cent to US$292.4 million.

Declining hardware demand is having a ripple effect for IT suppliers as well. Gartner analysts said Monday that capital equipment spending for semiconductors will plunge this year, before a slow recovery in 2010.

Worldwide capital equipment spending is forecast to total US$16.9 billion in 2009, a 45.2 per cent decline from 2008 spending of $30.8 billion.

"The dramatic crisis in world economics that came to light late in the third quarter and fully engulfed the fourth quarter of 2008 slowed capital spending in all segments of the semiconductor market," said Klaus Rinnen, managing vice president for Gartner's semiconductor manufacturing group.

In addition, the dynamic-random-access-memory market has been in turmoil. Shares in Japan's Elpida Memory and Taiwan's DRAM chip makers fell Thursday after a government official was reported saying that Taiwan may buy factories from vendors, instead of purchasing the companies themselves.

"The overspending on memory in the past three years, combined with a retrenching consumer market, presents little potential for an upside until 2010," Rinnen said.

There were some glimmers of good news this week. Chip maker Texas Instruments said Monday that it now expects first-quarter sales of US$1.79 billion to $2.05 billion, compared with a prior projection of $1.62 billion to $2.12 billion. The midpoint comes in at $1.92 billion, above the consensus forecast of $1.86 billion by analysts polled by Thomson Reuters.

Conventional wisdom says the largest IT companies with a global footprint and broad portfolio of products are best positioned to weather the crisis. In a letter to shareholders accompanying IBM's annual report, CEO Sam Palmisano said Monday that the IT giant is "positioned to lead in the era that lies on the other side of the present crisis."

"We will not simply ride out the storm," Palmisano said. "Rather we will take a long-term view, and go on offense."

Last month IBM reported that net earnings for the fourth quarter rose 12 percent to US$4.42 billion, or $3.28 a share.

But with the broader tech market expecting a continuing sales slump, the recent Nasdaq gains - which were fueled by hope for the financial industry more than specific expectations for IT - may well be wiped out. A lot rides on the G20 meeting of industrialized nations in the U.K. this weekend.

U.S. President Obama is pushing for an integrated global stimulus plan and concerted approach to the banking sector crisis. If the countries do not produce an accord, hopes for the financial sector may be dashed once again. If that happens, markets are likely to slump again and technology is not likely to be spared. Over the past year, technology company shares have declined by 37 per cent, not much better than the 45.4 per cent suffered by the broad S&P 500 Index.

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